National Living Wage: an in-depth guide An overview
March 2016 Contact the author:
On 1 April 2016 the National Living Wage will be introduced, increasing legal minimum wage for workers aged 25 and over to £7.20 per hour (rising from the current National Minimum Wage of £6.70 per hour). A huge impact is expected on businesses in the retail, social care and hospitality sectors, amongst others, with many businesses stating that they will need to take steps to cut staff numbers to manage the increased wage cost. This guide explains key business obligations and the legal implications of some possible costreduction strategies.
Carolyn Brown Partner, Head of Employment T: +44 (0)20 3755 5390 E: carolyn.brown@howardkennedy.com
What is the National Living Wage? The National Living Wage (NLW) is an increased National Minimum Wage (NMW) rate which will apply to workers aged 25 and over. The NLW rate from 1 April 2016 will be £7.20 per hour, an increase of 50p on the current NMW and the NLW is expected to rise to £9 per hour by 2020. Although they share a name, it is important not to confuse this with the Living Wage Foundation’s recommended Living Wage, which is already £8.25 per hour outside London and £9.40 within London but is not legally binding. The current NMW rates will continue to apply to workers aged under 25. The rates differ depending on the workers’ status and age. The current hourly rates are: Age 21 - 24
Age 18— 20
Age under 18
Apprentice (age 16 – 18 or 19 and over if first year of apprenticeship)
£6.70 (£6.96 from October 2016)
£5.30
£3.87
£3.30
Both the NMW and NLW rates will be reviewed annually. Increases to the NLW will take effect in April each year, while NMW will continue to rise every October.
Who will be entitled to the National Living Wage? Workers aged 25 and over who are currently entitled to the NMW will be entitled to the NLW. This includes:
Employees
Casual, temporary and agency workers
Agricultural workers
Apprentices who are not in the first year of their apprenticeship.
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How is the NLW calculated? Like the NMW, the NLW is a minimum hourly rate. Eligible workers must receive at least the NLW for each hour worked in the pay reference period (if the worker is paid monthly, the pay reference period is one month, but it can be a shorter period if the worker is paid at shorter intervals e.g. every week). The calculation depends on whether the worker is paid by the hour, salaried (i.e. paid the same salary regardless of hours worked), paid according to output or has neither set hours nor a set salary. Where workers are paid by the hour or receive a salary, a key question is what counts as working time for which the NLW must be paid.
Counts towards working time
Worker paid by the hour
Salaried worker
Time spent working
Time spent working
Standby or on-call time: if they are available and required to be available for work at or near a place of work for the purpose of doing such work (subject to exceptions below)
Standby or on-call time: if they are available and required to be available for work at or near a place of work for the purpose of doing such work (subject to exceptions below)
Travelling during normal working hours
Travelling during normal working hours
Attending training during normal working hours.
Attending training during normal working hours
Time spent absent from work during which they receive their normal pay, such as paid rest breaks, sickness absence on full pay, etc. Doesn’t count towards working time
Time spent absent from work including holiday, sick leave or maternity leave (any pay received by the worker for such periods will not be taken into account either) Travel between home and work Standby or on-call time in the following cases: i) If their home is at or near the workplace, any time they are entitled to spend at home, or ii) If they have an arrangement to sleep at/near their workplace, any time they spend asleep or not working during their agreed sleeping hours Rest breaks (for example, a recognised lunch hour), even if the worker works voluntarily during that time Time spent taking part in industrial action (any pay received by the worker for such periods will not be taken into account either).
Any time for which they do not receive their normal pay, e.g. they are absent and receiving statutory sick pay or during unpaid leave Travel between home and work Standby or on-call time in the following cases: i) If their home is at or near the workplace, any time they are entitled to spend at home, or ii) If they have an arrangement to sleep at/near their workplace, any time they spend asleep or not working during their agreed sleeping hours Unpaid rest breaks Time spent taking part in industrial action (any pay received by the worker for such periods will not be taken into account either).
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What counts towards the National Living Wage and what deductions may be made? There are detailed rules on which payments and benefits count towards the current NMW and these will apply equally to the NLW. A key principle is that, with very limited exceptions, workers should receive their applicable legal minimum hourly rate in cash rather than in the form of benefits in kind. Some deductions from wages/payments by the worker reduce the amount of the total earnings for NLW purposes. The worker must receive at least the NLW after these deductions and payments have been taken into account. However, other deductions/payments by the worker do not reduce total pay for these purposes and the employer will comply with the law provided the worker's pay before these deductions or payments is at least the NLW. Payments to the worker/ benefits which count towards the NLW Basic salary Bonus, commission and other incentive payments based on performance (but not any premium paid for overtime or shift work)
Piecework payments Accommodation allowance. This is the only non-cash benefit which can be taken into account. Accommodation provided to the worker free of charge is treated as having a cash value prescribed by law. This value is treated as being added to the worker’s cash pay when calculating whether they receive the correct NLW rate
Allowances paid by way of HMRC dispensation agreements.
Payments to the worker/ benefits which do not count towards the NLW Benefits in kind (other than the accommodation allowance)
Loans by the employer and wage advances
Employer pension contributions
Redundancy and retirement payments
Tribunal or settlement awards
Any premium paid for overtime or shift work
Any allowances or payments that are not attributable to the employee's performance, e.g. London weighting or an on-call allowance (although if such sums are consolidated into basic pay they do count towards the NLW)
Expenses or allowances Tips and gratuities (even if paid by the employer through its payroll)
Some absence payments.
Deductions/payments by the worker which reduce NLW amount Deductions (or payments due from the worker) in respect of expenditure in connection with employment (for example, for buying tools, equipment or uniform)
Deductions (or payments by the worker to the employer during the reference period) for the employer's use or benefit
Any payment or deduction for accommodation to the extent that it exceeds the accommodation allowance amount.
Deductions/payments by the worker which do not reduce NLW amount Tax and National Insurance contributions
Deductions from pay (or payments made by the worker) under the contract because of the worker's conduct or any other event, in respect of which the worker is contractually liable. For example, retail workers may be liable for certain cash shortages
Deductions (or payments made by the worker) under an agreement for a loan or advance of wages
Deductions (or payments made by the worker) because of an accidental overpayment of wages
Deductions (or payments made) for the purchase of shares, securities, share options or a partnership
Payments made by the worker to buy goods or services from the employer (for example, buying food from a staff canteen), unless this is compulsory
In certain cases, deductions by (or payments to) a social landlord or housing authority for accommodation
Certain other deductions such as union subscriptions and pension contributions. If you would like more information on our services, please visit www.howardkennedy.com here you will find all our latest news, publications and events. This material is for general information only and is not intended to provide legal advice. © Howard Kennedy LLP 2016
Accommodation allowance This is the only non-cash benefit which can be taken into account. Accommodation provided to the worker free of charge is treated as having a cash value prescribed by law. This value is treated as being added to the worker’s cash pay when calculating whether they receive the correct NLW rate.
Tips and service charges Since 1 October 2009, employers have not been able to count tips or service charges when determining whether the worker has received the NMW. This is the case even if the money is paid by the employer or through a troncmaster rather than direct from the customer. This rule applies equally to the NLW.
What happens if a business does not comply? Workers entitled to the NLW who do not receive the correct rate of pay, can bring Employment Tribunal claim against their employer for unlawful deduction from wages. Separately, HMRC may take civil enforcement action, including imposing substantial fines. The fine for non-payment will be 200% of the amount owed, up to a maximum of £20,000 per worker (although this is reduced by half if the fines are paid within 14 days). HMRC also regularly “names and shames” non-compliant employers. Company directors may face criminal prosecution if the company has failed to pay the NLW and may be disqualified from being a director for up to 15 years.
Legal protection of workers Workers are protected currently against retaliatory action linked to the National Minimum Wage and will now be in respect of the National Living Wage. This protection limits the ability of businesses to take immediate targeted steps to reduce additional staff costs resulting from the introduction of the NLW.
Dismissal/detriment Dismissing an employee or subjecting a worker or employee to a detriment because they become eligible for the NMW or a different NMW rate, they take action to ensure they receive the correct NMW rate or because the employer is prosecuted for an NMW-related offence is unlawful and entitles the employee/worker to bring an Employment Tribunal claim. Dismissal of an employee in these circumstances is automatically unfair and so the employee does not need 2 years’ service to bring an unfair dismissal claim on that basis. These protections all apply equally to the new NLW. This means that the legal implications of cost-cutting strategies need to be carefully considered. If redundancies need to be made, the selection criteria must be designed so that the employer can show that employees were not selected for redundancy because they would receive the new NLW rate.
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Age discrimination Dismissing (or refusing to hire) workers aged 25 and over (or offering them fewer shifts because the NLW now applies to them) would amount to age discrimination. Although both direct and indirect age discrimination can be lawful if objectively justified, it is generally not possible to justify discrimination on cost grounds alone and so this strategy would likely be unlawful.
Cost-mitigation options Options available to businesses looking to reduce wage costs as a result of the NLW include:
Reducing working hours or use of overtime
Removing or reducing non-contractual benefits
Changing contractual terms after consultation with staff (and, if an agreement cannot be reached dismissing and re-engaging on the new terms)
Making redundancies.
In each case, targeting these workforce changes only at workers now eligible for the NLW would place the business at risk of detriment and age discrimination claims. In addition, businesses would need to consider:
Whether overtime is purely at the business’ discretion or whether employees have any contractual right (e.g. through custom and practice) to a certain number of overtime hours
Likewise, whether benefits are genuinely non-contractual or whether removing them may give rise to breach of contract claims
Whether staff are likely to agree to the revised contractual terms and, if not, whether any resulting dismissals would be unfair (bearing in mind that there would need to be a genuine business case to justify dismissal
Whether redundancies or other dismissals would trigger collective consultation obligations.
If you would like more information on our services, please visit www.howardkennedy.com here you will find all our latest news, publications and events. This material is for general information only and is not intended to provide legal advice. © Howard Kennedy LLP 2016